Several large U.S. banks have set aside extra money to pay for potential legal costs in part because of JPMorgan Chase & Co's massive $13 billion settlement with U.S. authorities over bad mortgages, according to two sources familiar with the situation.

The size of the JPMorgan settlement, which the government called the largest in U.S. history, led many banks to realize that the cost of resolving some of their own legal problems was likely to be higher than they had initially believed, the sources said.

Justice Department officials have said in public statements they want to use the JPMorgan settlement as a template for deals with other banks.

Bank of America, Citigroup, Goldman Sachs and Morgan Stanley all added hundreds of millions of dollars to funds they have set aside to pay for the cost of litigation, including legal fees, fines and settlements. All four banks are facing mortgage-related investigations by federal prosecutors located in different parts of the country.

The increase in such funds impacted the fourth quarter results of the banks published this week, surprising many analysts.

The total amount of the four banks' increases in litigation reserves could not be determined because the banks reported them in different formats. A U.S. Securities and Exchange Commission rule says companies must only reserve funds for losses that are "probable and estimable," but does not require companies to disclose how the reserves match their specific expectations.

Spokesmen at all four banks declined to comment.

The additions to legal reserves show how cases related to practices that sometimes date back to before the financial crisis are likely to continue to cause pain to the U.S. banking industry. U.S. and European regulators fined banks record amounts last year, imposing penalties and settlements of more than $43 billion as authorities work more closely across borders to clean up the financial sector.

The U.S. government's Residential Mortgage Backed Securities Working Group, a network of federal and state prosecutors and investigators set up in 2012, has been poring over records and testimony relating to residential mortgage-backed securities (RMBS). Many of these assets were stuffed with home loans that were badly underwritten and issued in the years leading up to the crisis.

"Where the industry thought they were at the tail end of it there's reason to wonder whether there's a whole new round of broader suits that may be brought," said Joshua Rosner, a managing partner at Graham Fisher & Co, an independent research consultancy.

Goldman Sachs said its net provisions for legal expenses in 2013 amounted to $962 million, up from the $448 million it reserved throughout 2012. Bank of America said it had added $2.3 billion to its reserves during the fourth quarter, up from $1.1 billion in the third quarter. Citi added $809 million in the fourth quarter after adding $677 million in the third quarter.

Morgan Stanley added $1.2 billion in the fourth quarter to its litigation reserves, and specifically cited investigations "related to residential mortgage-backed securities and the credit crisis" as the motivation for doing so.

Citigroup Chief Financial Officer John Gerspach said in a conference call with analysts to discuss quarterly earnings that he expected the bank's legal expenses relating to its "legacy assets" would "remain elevated." Legacy assets include mortgage-backed securities that the bank packaged and sold before the crisis.

"It's driven by the higher level of litigation-related activity throughout the industry," Gerspach said on Thursday, adding that Citi's consideration of the landscape had included "things that you've seen hit the press as far as the industry."

(Additional reporting by Peter Rudegeair in New York and Aruna Viswanatha in Washington; editing by Andrew Hay)

New York Attorney General Eric Schneiderman has abandoned his effort to obtain damages from Bank of America Corp over its purchase of Merrill Lynch & Co, but plans to press on with the case, his lawyers said in court on Friday.

Schneiderman will seek to bar the bank's former chief executive, Kenneth Lewis, and former chief financial officer, Joe Price, from the securities industry and from serving on boards of public companies, according to his office. It was not clear what sanctions he would seek from the bank.

The 2010 lawsuit filed in New York state court by Schneiderman's predecessor, Andrew Cuomo, accused Bank of America of misleading shareholders about Merrill's losses and bonus largesse prior to a December 2008 vote on the merger.

Merrill posted a $15.84 billion loss in the fourth quarter of that year, even as it paid out $3.62 billion in bonuses. The merger closed in January 2009.

Last April, a federal judge approved a $2.43 billion class-action settlement on behalf of shareholders.

Under a 2008 decision by New York state's highest court, Schneiderman cannot recover damages on behalf of investors who have already settled.

"We're not seeking damages in this case," Philip Barber, a lawyer for Schneiderman, said at a status conference on Friday. "It has been a number of years and we're trying to move this to conclusion."

He said the office would seek a judgment against the defendants, but did not specify what it should contain. Lawyers for the bank and the executives said they would try to have the case dismissed before trial.

Schneiderman, who became state attorney general in 2011, was criticized this week by people close to Cuomo for failing to get the case completed before the class action settlement.

Schneiderman's office told Reuters on Friday the $2.43 billion settlement in the class action had provided "great relief" to the investors, and that the private settlement used evidence gathered by the office.

The New York Times this week reported a deteriorating relationship between Schneiderman and Cuomo, and noted a battle over $613 million New York received as part of JPMorgan Chase & Co's $13 billion settlement with U.S. authorities over mortgage-backed securities.

A Schneiderman spokesman declined to comment on the relationship on Friday. A Cuomo spokesman did not return a call for comment.

Lawrence Grayson, a spokesman for Bank of America, declined to comment on New York's pursuit of the case. A lawyer for Lewis declined comment, and a lawyer for Price did not immediately respond to a request for comment.

The case is People v Bank of America Corp, New York State Supreme Court, New York County, 450115/2010.

(Reporting By Karen Freifeld.; Additional reporting by Jonathan Stempel in New York. Editing by Andre Grenon)

The initial reads on earnings have been mixed, and yet U.S. stocks are hovering near all-time highs. Next week, investors will see whether the first companies out of the gate were a harbinger of what's to come.

More than 60 S&P 500 companies are scheduled to release results next week, including more than half a dozen Dow components. The reports will give the fullest picture yet of how corporations are faring and whether the market can advance further as Fed stimulus begins to recede.

"Given that equities are fully valued and arguably overvalued, we need earnings and revenue to come through to support the gains we've already made," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago. "There's a reasonable chance we could see a 10 percent correction in the event we get some high-profile disappointments."

Earnings for S&P 500 companies are seen rising 7 percent in the quarter, down from the 7.6 percent rate that had been forecast at the start of the year.

While the season started with many financial firms, including JPMorgan Chase & Co ( id="symbol_JPM.N_0">JPM.N) and Bank of America ( id="symbol_BAC.N_1">BAC.N), topping profit expectations, Intel Corp ( id="symbol_INTC.O_2">INTC.O) sounded a sour note, slumping on a weak revenue outlook. General Electric Co ( id="symbol_GE.N_3">GE.N) sold off despite posting higher-than-expected revenue, suggesting blowout results may be needed to justify elevated valuations.

With 10 percent of the S&P 500 having reported results so far, 50 percent have topped earnings forecasts, well below the historical average of 63 percent, according to Thomson Reuters data. More than 67 percent have beaten revenue expectations, above the long-term average of 61 percent.

The U.S. stock market will be closed on Monday for the Martin Luther King Jr. holiday.

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WATCHING FOR SIGNS OF BUSINESS SPENDING

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BMO's Ablin said that results from more cyclical groups would be especially important for insight into the strength of the overall economy.

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"The next leg of the cycle has to be driven by business spending," he said. "I'm looking for clues that businesses are taking their excess cash flow and spending it, which means tech and industrial reports will be very important, especially any outlooks they offer."

Another key name will be Netflix Inc ( id="symbol_NFLX.O_11">NFLX.O), the S&P 500's biggest gainer in 2013. The online movie renter's stock nearly quadrupled last year, raising concerns it may follow the same path as another of 2013's momentum favorites, Best Buy Co Inc ( id="symbol_BBY.NBBY.N). On Thursday, the electronics retailer's stock suffered its worst daily decline since 2002 after posting weak holiday sales and giving a downbeat margin forecast.

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Jonathan Krinsky, chief market technician at MKM Partners in Greenwich, Connecticut, said the market was "absolutely vulnerable to a pullback on big disappointments," though the S&P 500 might find support at its 50-day moving average, about 1.7 percent below Friday's close at 1,838.70.

"If we take that out, that would be the first time we've made a lower low in a while," he said. "That could push us to retest the December low around 1,770."

In the latest week, the Dow rose 0.1 percent, the S&P 500 slipped 0.2 percent and the Nasdaq climbed 0.6 percent. Both the Dow and S&P 500 are within striking distance of all-time highs.

For the year so far, the Dow is down 0.7 percent and the S&P 500 is down 0.5 percent, while the Nasdaq is up 0.5 percent.

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The forward price-to-earnings ratio for the S&P 500 is about 15.22, according to Thomson Reuters data, roughly in line with the historic average. While that suggests valuations are not tremendously stretched, further steep gains may be difficult to come by.

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"We're much more likely to fall on negative earnings than we are to rally on strong ones," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville. "There's much more downside risk than upside at these levels, and that will probably be the case until we work off some of the excess out there."

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Next week will be a light one for economic data, with Thursday's read on December existing home sales perhaps the biggest report. Sales are forecast to edge up for the month, according to economists polled by Reuters.

China's home prices continued to surge in December, though the pace of gains overall did not exceed the previous month's and rises eased in some major cities, suggesting that government tightening measures may be starting to bite.

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Home prices in many Chinese cities have continued to set records in the past year despite a four-year long government campaign to cool the market, adding to the threat of a price bubble and forcing some local governments into a fresh round of curbs in November.

Average new home prices in 70 major Chinese cities climbed 0.4 percent in December on the month, easing from November's 0.5 percent and the fourth straight slowdown since August's 0.8 percent gain, according to Reuters calculations from data released by the National Bureau of Statistics (NBS) on Saturday.

"The slower home price gains in December showed recent curbs unveiled by local governments in tier-1 and some tier-2 cities have started to stabilize market expectations gradually," said Liu Jianwei, a senior statistician at NBS, in a statement accompanying the data.

Under pressure to rein in a red-hot housing market, many local governments have rolled out targeted measures to cool fast-rising property prices, including raising minimum down payments for second homes and promising to supply more land for building residential properties.

Prices in the capital Beijing rose 16 percent in December from a year ago, easing slightly from November's year-on-year increase of 16.3 percent, and the second month of slowing gains after a record jump in October.

In the southern cities of Guangzhou and Shenzhen, gains eased to 20.1 percent and 19.9 percent respectively from 20.7 percent and 20.6 percent in November, their first slowdown this year.

STILL HIGH, NO EASING OF CURBS

Still, the government measures are yet to significantly curb buyer appetite and property inflation.

The NBS data showed nationwide new home prices rose 9.9 percent in December from a year ago, the 12th consecutive annual rise and the same as the previous month's record gain.

The relentless rise of home prices suggests Beijing won't let up on its tightening measures anytime soon.

China's housing minister said in December the government would maintain controls on the property market in 2014 while increasing land and housing supply in cities facing big home-price increases.

More recently, local media reported on Monday the land ministry plans to form a nationwide property registry database, seen as a precursor to any country-wide expansion of property taxes, which have been on trial in Shanghai and Chongqing since 2011.

However, efforts to get the database up and running have faced resistance from local governments and groups with vested interests.

China's property values have surged over 20 percent in the past four years, underscoring worries of a property bubble and social unrest as millions of first-home buyers are priced out of the market.

Policy makers want to avoid a sharp slowdown in the property market as real estate is a bright spot in a slowing economy. The sector supports some 40 other industries and generates about 16 percent of the country's $8.5 trillion gross domestic product.

The next several months will probably shed more light on whether Beijing has done enough to tame the market. Analysts say China's home price rises are likely to moderate in 2014 thanks to increased supply and impact of government measures.

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A vibrant market for land sales in 2013 is also expected to translate into a surge in home supply this year, helping put the brakes on home prices gains.

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The amount of new land supplied for residential property development hit a record high of 138,200 hectares in 2013, up 25 percent on the year, data from the Ministry of Land and Resources shows.

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A Reuters poll in November had also predicted a slowdown in house price growth, with analysts forecasting a rise of 5.0 percent this year after a predicted 10 percent in 2013.

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Reuters started its weighted China home price index in January 2011 when the NBS stopped providing nationwide data, only giving home price changes in each of 70 major cities.

In early 2011, Morgan Stanley Chief Executive James Gorman thought he had finally figured out how to rebuild the bank's depleted bond trading business without taking too much risk.

He hired traders from rivals in areas where the bank was relatively weak, such as trading government debt, and exhorted his sales staff to gain new clients and win more trades from existing customers.

On Friday, after three years of spotty results, Gorman flipped the script, announcing a new strategy for fixing the operation: shrinking and taking less risk. It is at least the fourth time the bank has tried to retool the business since the financial crisis.

Rivals and some analysts are skeptical that Gorman has it right this time.

"Whether banks can really compete and be profitable on a smaller scale - that's the million dollar question," said Lisa Kwasnowski, an analyst at the bond ratings firm DBRS who is supportive of Gorman's plan.

Bond trading - including fixed income, currencies, and commodities - has historically been a profit driver for banks such as Morgan Stanley and Goldman Sachs Group Inc, but new capital and trading rules from regulators in the aftermath of the financial crisis have squeezed profits.

Morgan Stanley saw its bond trading revenue fall 14 percent, excluding an accounting adjustment, in the fourth quarter. Revenue from the business also fell for Goldman and Citigroup Inc. Nearly every major global bank is examining what to do with their fixed income businesses in light of new regulations.

Bond trading has been critical for banks for more than a decade, both as a source of profits and as a way to win lucrative underwriting and merger advisory assignments.

If it is too small, those benefits can disappear fast. For example, a company looking to issue bonds may not be confident that the underwriting bank will continue to trade them after the deal is initially sold.

But Gorman has said he thinks that Morgan Stanley can continue to meet client needs even after it shrinks the business. His latest plan includes a new, more centralized management team, and "a particular focus on expenses, technology, capital, and balance sheet," he said on a conference call with analysts on Friday.

He is meeting some resistance from traders. Glenn Hadden, global head of interest-rates trading, was so vocal in his opposition to the changes that he was eventually asked to resign, said two people familiar with the matter.

Hadden declined to comment when reached on Friday.

Earlier this month, Hadden cited the new strategy as his reason for leaving.

Morgan Stanley hired Hadden, a former Goldman Sachs trader in March 2011, and told him to win new business. But soon after that, new regulations started to hurt bond trading. Morgan Stanley's debt ratings fell as well, making customers less willing to enter into lucrative longer-term derivatives contracts with the bank.

In May, Hadden's boss quit, to be replaced by Michael Heaney and Robert Rooney as co-heads of fixed-income sales and trading. The two executives sought to reduce risk and centralize management of the sprawling business.

One element of that centralization plan particularly irked senior traders: the co-heads now make decisions about how much money every individual trader can trade, according to the sources.

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In the past, heads of fixed-income sales and trading would allocate capital to the desk, and let the desk determine how much money individual traders could use. Traders complained that the tighter controls limited their risk-taking and bonus potential, the sources said.

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'THEY CUT AND CUT'

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Limiting risk is critical to Gorman. He is keenly aware of Morgan Stanley's bad bets on subprime mortgages that in 2008 nearly capsized the company and forced it to take a government bailout. Coming out of the crisis, then-CEO John Mack took a much more cautious stance in fixed-income trading, slashing jobs and risk-taking.

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His move made sense at the time but left Morgan Stanley unprepared for a bond trading boom in 2009 and 2010 that created the most profitable year ever for rivals, including Goldman Sachs.

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Part of Gorman's strategy is to cut the bank's risk-weighted assets, a measure of assets that makes it easier for the bank to hold onto safer instruments like U.S. government bonds.

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The bank is in the process of winding down a big pool of fixed-income assets by more than half to $180 billion by the end of 2015, on a risk-weighted basis. The bank has another $30 billion worth of assets to go, and on Friday accelerated the timeframe for the task to be completed.

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Some rivals have argued that the bank cannot compete if it is too small, and say Morgan Stanley should go the way of UBS AG, which announced a decision to exit FICC trading almost entirely in October 2012.

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"History has shown people don't give up businesses easily - they cut and cut, and make strategic changes before they finally throw in the towel," said an executive at a rival firm. "If you cut and are weak to begin with, it's hard to see how you get stronger."

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Morgan Stanley officials say they do not want to be big just for the sake of it, preferring to be smaller but profitable.

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They also say they are not shrinking the business so drastically that they won't be able to compete and that it is big enough to maintain a presence in most major bond and derivatives markets. The bank knows it needs a fixed income arm to serve its other clients.

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"At a minimum, they need to accommodate clients in the wealth management and investment banking businesses," DBRS' Kwasnowski said.

Spinning off the clean-up project at Japan's wrecked Fukushima nuclear plant from the rest of operator Tokyo Electric Power's business could be an option in the future if the decommissioning runs smoothly, the company's president said.

Nearly three years after a devastating earthquake and tsunami hit the plant, Tokyo Electric (Tepco) is still struggling to contain radioactive water at the site and turn around its battered finances.

"Paying compensation (to evacuees), decontamination, and the work at the Fukushima plant; there is a lot of work to be done ... We have to continue doing this, while maintaining the workers' safety, their sense of responsibility, duty and keeping up their morale," said Naomi Hirose in an interview with Reuters on Saturday.

Hirose said if working conditions improve significantly at Fukushima and worker shortages become no longer a problem, the utility could consider hiving off the Fukushima decommissioning from the rest of the business, a suggestion that had been made by policymakers since the disaster. But for now, Hirose said he remained opposed to such a scheme.

Japan this week approved a plan by Tepco, Asia's largest utility, which aims to make savings in costs of $46 billion over 10 years, upgrade fossil fuel power plants and join alliances with other firms to procure liquefied natural gas (LNG) more cheaply.

But central to Tepco's revival plan is the restart of the reactors at Kashiwazaki Kariwa, the world's biggest nuclear power plant, as early as July, which faces staunch opposition from a local governor who has repeatedly called for the company's liquidation.

Governor Hirohiko Izumida of Niigata, home to the Kashiwazaki plant some 300 kilometers (180 miles) northwest of Tokyo, said this week Tepco's plan does not hold shareholders and banks accountable. He has also said that Tepco must not be allowed to consider restarting its other nuclear facilities before a comprehensive review of the Fukushima disaster.

Tepco also said in its latest revival plan that it may have to raise electricity prices by as much as 10 percent if Kashiwazaki restarts are further delayed.

FUKUSHIMA WORKERS

The unprecedented, 30-year decommissioning plan for Fukushima relies heavily on technological breakthroughs and on Tepco managing to get enough staff to work there.

Tepco doubled pay for contract workers at the plant to around $200 a day last year after criticism over its handling of their pay.

Previously a Reuters investigation had found that the pay of some workers was being skimmed off by sub-contractors, some had been hired under false pretences, and some contractors had links to organized crime gangs.

Hirose said Tepco does not permit workers' pay to be skimmed by the various companies in the chain of contractors operating at Fukushima, but admitted that verifying whether laborers' wages had actually been docked or not was complex.

"We did not increase (wages) to give out more money to those (firms) in the middle. Raising wages from 10,000 yen ($100) to 20,000 yen was difficult for us ... of course we want the money to reach the correct place," he said.

Vattenfall unplugged! With flyers, posters and an animated film of a bear disconnecting the Swedish utility that operates the Berlin electricity grid, campaigners tried to convince voters to put power distribution back in public hands.

The November referendum in Berlin failed, but in September, citizens of Hamburg, Germany's second-biggest city, voted to return their power grid, also run by Vattenfall, to public ownership.

The votes were organized by citizens' groups who want municipalities to buy back electricity distribution networks from private utilities, because they say local authorities can provide a cheaper and better service.

The German movement is part of a Europe-wide reversal of the trends towards liberalization and privatization that have driven energy policy in the past decade.

While ostensibly backing free energy markets, many European governments squeeze utilities by intervening in power generation while also capping energy prices. This creeping renationalization cuts utilities' profits by billions of euros.

The idea behind the EU-driven energy liberalization was to force the old monopolies to compete so that prices could fall and services improve.

Countries privatized utilities and split them into private power producers and independent, but government-regulated network operators. Energy retailing was also freed up for vendors to compete for household accounts.

But as Europe created a free market for power generation, it also brought back regulation by encouraging wind and solar power generation with generous state subsidies.

As renewable energies boomed, their priority access to the grid and cost-free operation crowded out the utilities' traditional plants, to the point that gas-fired generation has become virtually uneconomical in Europe.

With their investment choices for producing power limited by government policies, utilities also saw their retail prices regulated. Spain and France limit energy prices for consumers, while Germany provides big discounts for industry.

But keeping prices low for consumers and industry, while also favoring green power generation and maintaining security of supply is just not possible.

"RENATIONALISING OUR REVENUES"

Critics say that these mutually exclusive targets have made much of Europe's energy regulation so inconsistent that private firms can no longer operate profitably. Investment in non-subsidized generation has virtually dried up.

"At some point the regulatory risk gets so bad that it might be better to give the political risk back to the policy makers by renationalizing the sector," said Georg Zachmann of Brussels think tank Bruegel.

A country close to this point is Spain, where generous subsidies to the renewables sector and caps on energy prices have led to the build-up of a 30 billion euro power tariff deficit - the difference between the cost of energy and what utilities are allowed to charge for it.

Last month, the Spanish government scrapped plans to reduce the deficit by sharing it between utilities, consumers and the state, and pushed the debt back onto the balance sheets of utilities such as Iberdrola, Endesa and Gas Natural, which will have to hold it for 15 years.

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For the Spanish utilities, this boils down to a creeping nationalization of their profits.

Spanish Industry Minister Jose Manuel Soria told Reuters in November he does not think utilities should be renationalized and more competition is better for consumers.

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But Spain might serve as an example of where other countries are heading, as more and more EU governments dictate investment choices through subsidies and regulate tariffs.

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Britain - the cradle of European energy liberalization - seems like an unlikely candidate to lead the way: its Electricity Market Reform, to come into force this year, will introduce the "Contracts for Difference" scheme, which offers price guarantees for low-carbon energies.

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The British package will also dictate which power plants receive public money to provide backup power generation.

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In October, Britain agreed to give unprecedented loan guarantees and a 35-year power price guarantee in a deal with France's EDF to build a nuclear plant at Hinkley Point.

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This will reverse more than a decade of non-intervention in power generation and turn Britain's low-carbon energy production - essentially offshore wind and nuclear - into a government-regulated activity.

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Britain's opposition leader Ed Miliband promised more regulation in September by saying he would freeze retail energy prices for 20 months if he were elected in 2015.

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"The UK led the way in liberalization and I think it is leading the way - for better or worse - in changing its market framework towards having a much greater role for the state," said Compass Lexecon energy consultant Fabien Roques.

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"EXPROPRIATION"

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The most radical renationalization drive in Europe is in Hungary, where the government wants to turn utilities into non-profit organizations.

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Prime Minister Viktor Orban wants to nationalize six or seven utilities and if he is re-elected this spring he plans to make them "community-owned" within a year or two.

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Most of Hungary's energy sector is foreign-owned, mainly by German, French and Italian firms including E.ON, RWE, EDF, GDF Suez and Eni.

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Late last year, state-owned energy group MVM bought E.ON's gas trade and storage businesses and it is also in talks with RWE about buying its stake in Budapest gas utility Fogaz Zrt.

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Hungary does not confiscate the foreign-owned firms, but pays for the assets, albeit at prices depressed by a tough regulatory regime and state-imposed energy price caps.

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RWE East chairman Martin Herrmann says Hungary's moves are unacceptable and has spoken of "expropriation".

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"PLANNED ECONOMY"

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Germany's movement to put local power networks in municipal ownership is relatively benign, as it allows utilities to sell their assets at market prices and redeploy capital elsewhere.

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"It is not renationalization but remunicipalisation that we are after. Energy issues should be dealt with on a local level," said Stefan Taschner, head of BurgerBegehren Klimaschutz which drove the Berlin campaign.

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Taschner thinks all power distribution networks should be in municipal hands, although he does not object to "a good mix" of public and private ownership for power generation assets.

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After losing the Berlin referendum, the group is now helping citizens' groups in cities such as Essen and Karlsruhe wrest distribution networks from private ownership.

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"I have been in the industry 25 years and I have seen cities go three times private and three times public so I would not overinterpret the moment," E.ON CEO Johannes Teyssen told Reuters, adding that public owners would face the same cost pressures as private utilities.

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Teyssen is part of the dozen-strong Magritte group of utilities CEOs, which represent half of Europe's electricity generating capacity. They say European energy policy is a failure, as retail power prices are higher than ever, security of supply has weakened and investment has stalled.

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The group wants an end to subsidies for "mature" renewable energies such as onshore wind and solar.

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Two of its proposals - strengthening the European carbon market and the establishment of EU guidelines for capacity remuneration mechanisms - actually offer more regulation and would increase the role of the state in energy policy.

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Capacity mechanisms - under which utilities are paid, and sometimes forced, to keep idle plants on standby - are the most recent development in EU utilities regulation.

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In Germany, where utilities are already told by government in which assets to invest (renewables) and which not (nuclear), they are now also told where not to divest.

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Utilities must get approval from the regulator to close plants and can be forced to maintain unprofitable operations to minimize blackout risk.

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Dirk Uwer, partner at German law firm Hengeler Mueller, said utilities can no longer take plants off grid for economic reasons, since grid operators and regulators can order them to stay online in exchange for compensation payments.

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"We have arrived at a planned economy," he said.

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(Additional reporting by Christoph Steitz and Vera Eckert in Frankfurt, Tracy Rucinski in Madrid and Karolin Schaps in London; Editing by Giles Elgood)

Elsa Schiaparelli, doyenne of 1930s Paris fashion, may be long gone - buried in her favorite hue of shocking pink - but nearly 200 pieces from her closet, along with her fine art and furniture, may enjoy a second life after an auction next week.

In the heady, pre-war Paris of the 1930s, Italian-born Schiaparelli exerted her sense of subversive, outlandish whimsy on couture from her design studio on the Place Vendome, creating conversation pieces that flouted convention.

Devotees of the trailblazer who dared women to be bold can choose between a silk violet blouse from the "Astrology" collection, a series of Man Ray photographs of the designer, a multi-colored feather boa or a delicately painted bird cage - up for the highest bidder at the January 23 auction in Paris.

"She had this incredible side of her that loved to have fun, that was very original, that dared to do anything, that was provocative but always chic," said Schiaparelli's granddaughter, Marisa Berenson, on Friday.

Described by Time magazine in 1934 as "madder and more original than most of her contemporaries," Schiaparelli hobnobbed with the avant-garde artists of the day like Salvador Dali and Jean Cocteau, both of whom became collaborators. Her greatest rival was Coco Chanel.

She was the first to fuse fine art with fashion and her creations adorned the likes of the Duchess of Windsor, Marlene Dietrich and Joan Crawford.

Whether designing a white organza evening gown printed with the image of a lobster, a hat that resembled a high-heeled shoe, adding lips to pockets or bugs to necklaces, Schiaparelli's daring and provocative sense of humor make Lady Gaga's zaniness today look almost ho-hum.

"She went to one famous ball dressed as a radish with lots of birds eating off her and you have to have a great imagination to go, and also to dare to go, dressed as a radish. You have to have a sense of humor," Berenson said.

"It was Schiaparelli who pointed the way for all subsequent designers who have made bold, subversive statements through dress," says the Christie's auction catalogue.

Echoes of Schiaparelli can be seen in the work of designers Jean-Paul Gaultier, Marc Jacobs, Alber Elbaz and Miuccia Prada.

FLAIR FOR FLAMBOYANCE

Matador jackets in pink and blue, 18th century tapestries, tunics from China, Japanese kimonos and Ottoman kaftans, elegant turbans and exotic tabletop items made from horns are all on offer in the auction expected to raise about 800,000 euros.

So too is a series of Jules Cheret posters from the Belle Epoque, fashion sketches from French illustrator Christian Berard and a plaster figure of Mae West, whose curvaceous form inspired the bottle for Schiaparelli's "Shocking" perfume.

The designer who was photographed by Man Ray and Irving Penn and drawn by Picasso had a fondness for furniture. A Napoleon III giltwood two-sided settee upholstered in delicate lavender silk is expected to fetch up to 800 euros.

Christie's says the star lot is a bronze standing lamp designed by Alberto Giacometti estimated at 60,000-80,000 euros.

"She's right up in the top echelon of couture history and couture purchases," international specialist in fashion and textiles from Christie's, Patricia Frost, said.

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Schiaparelli closed her studio in 1954 after liquidation. The brand was bought by Diego Della Valle, head of Italian leather goods company Tod's, in advance of a high-profile relaunch in 2012.

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Creative Director Marco Zanini, formerly of Halston and Rochas, is set to show his first haute couture collection for the brand in Paris on January 20.

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In her 1954 autobiography, Schiaparelli wrote: "Ninety percent (of women) are afraid of being conspicuous, and of what people will say. So they buy a gray suit. They should dare to be different."

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Schiaparelli was laid to rest in 1973 in Paris. She wore an antique Chinese robe in her favorite color.

In a letter to his college friend, a young J.D. Salinger writes about yearning for fame. In ensuing correspondence to the same woman and her son over the next four decades, the American author describes how much he loathes his status as a celebrity.

In the letters from Salinger to Ruth Smith Maier, a woman he met while attending Ursinus College in Pennsylvania in 1938, the two share stories about parenthood, working as a writer and general banter about popular culture.

The letters, which experts say humanize the notoriously reclusive author as he experiences a range of life-changing events, were acquired by the Harry Ransom Center, a humanities research library at the University of Texas, and made available to researchers this week.

In the earliest correspondence from January 1941, a confident 22-year-old Jerry Salinger writes to Ruthie that he intends to leave his mark as an author.

"Oh, but I'm good," he says in the single-spaced, typewritten letter. "It will take time to convince the public, but (it) shall be done."

He reminisces about his time and the people at Ursinus, giving a hint of themes that would be a part of his later work.

"For every hundred phonies, there is one goodie, and that is a better ratio than I find here in savage hometown New York," he says.

The next letter is dated 17 years later in 1958. During the intervening years, Salinger has been published in the New Yorker magazine, served as a soldier in some of the most brutal World War Two fighting in Europe, released his most famous novel "The Catcher in the Rye" and the book "Nine Stories".

Alarmed by his sudden fame, Salinger had also become reclusive since 1953, fiercely guarding his privacy in Cornish, a small town in northwest New Hampshire.

In the letter, Salinger talks lovingly about his young daughter Margaret, his fond memories of Ursinus and his disdain for the trappings of fame.

"These days, almost any incoming news of my fiction either irritates or chills, or just doesn't reach at all," he says.

Kenneth Slawenski, author of the acclaimed biography "J.D. Salinger: A Life", said long-running correspondences were common for the writer - such as one with a roommate from Valley Forge Military Academy - but that few scholars knew about the stream of letters that flowed between him and Maier.

"To my knowledge, Salinger never damned fame in itself (it is, after all, essential to selling books) but his letters frequently expressed disgust with the consequences of fame," Slawenski told Reuters in an email.

DISTRUST OF PUBLICATION

By 1969, Salinger was entrenched in the American mind as one of the country's best-known recluses. He writes to Ruth that year about taking enormous pleasure in watching his children grow and leaving celebrity behind.

"In my worst times, years back, all letters addressed to me were written in part or entirety in Holden Calfieldese (sic). It was like being in Hell," he wrote, referring to Holden Caulfield, the main character in "The Catcher in the Rye" and mail he received from fans and scholars.

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About nine years later, Salinger wrote to Ruth to talk about the fun he had visiting his son Matthew, who was studying in France, as the two went to cafes and took a road trip through the Alps.

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Salinger and Maier shared news about their children, praise for the actress Mary Tyler Moore and snippets from their daily lives, which - by Salinger's account - had grown quite dull.

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"I have no real news, and so little to say. I tend to think almost exclusively in Fiction, these years. Which seems fair enough to me, and after my taste, but leaves me short on any sparkling personal news."

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But Salinger was busy writing, telling Ruth's son Christopher that for most of the decade of the 1970s, he had been turning out some of his best fiction, writing "slowly, erratically but rather enormously."

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Biographer Slawenski said it is difficult to find any period of Salinger's life when he did not claim to be producing his best fiction.

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Much of what Salinger wrote during his period of isolation will not be seen until 2060, 50 years after his death, as he had stipulated. The author was 91 when he died in 2010 of natural causes.

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Three of those unpublished stories were leaked online late last year with the source likely being from an unauthorized book printed without Salinger's permission.

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In his letters, Salinger also says he has no intention of having his fiction staged or filmed, a comment likely directed at Hollywood producers who have tried for years to bring works like "Catcher" to the big screen.

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In a 1977 letter to Maier's son, Salinger wrote that he wants his fiction to be published, eventually, but not now.

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"Publication tends, for me, at least, to put all work still in progress in dire jeopardy. One reason being that I distrust the finality of publication," Salinger said.

Booker Prize-winning author Roddy Doyle, creator of some of Ireland's most renowned characters, will tackle one the country's best known when he teams up with Roy Keane to write the former footballer's memoir.

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Former Manchester United captain Keane and Doyle, author of books such as 'The Commitments', will collaborate on 'The Second Half', the fiery midfielder's autobiography set to be published later this year, the Orion Publishing Group said on Friday.

Keane, who wrote his first autobiography in 2002, shortly after walking out on the Irish national team during that year's World Cup, enjoyed a hugely successful playing career that was equally filled with controversy.

The ex-Ireland captain, who became assistant manager of the national team last year, won seven league titles with United and helped them to a first European title in over 30 years in 1999 before famously falling out with manager Alex Ferguson.

His World Cup walk out dominated the front and back pages of newspapers at the time and was even depicted in a musical that compared the dispute to a Shakespearean tragedy.

"Ten years ago I was buying something in a shop in New York and I handed my credit card to the young African man behind the counter. He read 'Bank of Ireland' on the card, looked at me and said: 'Ireland - Roy Keane,'" Doyle said in a statement.

"I'm delighted to be writing this book with Roy."

Doyle, 55, won critical and commercial success in the late 80s and early 90s with his first three novels, the so-called "Barrytown Trilogy" of 'The Commitments', 'The Snapper' and 'The Van', all of which were made into well-received films.

He was awarded the Booker Prize in 1993 for his novel 'Paddy Clarke Ha Ha Ha', which like his early work, was set in working-class Dublin and written in Doyle's idiosyncratic witty and richly descriptive style.

Spacewalking Russian cosmonauts on Friday spent over eight hours installing two cameras outside the International Space Station for a Canadian streaming-video business and then retrieving the gear due to connectivity problems.

Station commander Oleg Kotov and flight engineer Sergey Ryazanskiy left the station's Pirs airlock at 8 a.m. EST (1300 GMT) as the complex sailed 260 miles over Australia, mission commentator Rob Navias said during a NASA Television broadcast of the spacewalk.

It was the third spacewalk this week by members of the station's six-man crew. NASA astronauts Rich Mastracchio and Mike Hopkins made spacewalks on Saturday and Tuesday to replace a failed cooling pump.

During the first part of Friday's planned seven-hour outing, the Russian cosmonauts set up a high-definition video camera on a swiveling platform and a medium-resolution still imager for Vancouver-based UrtheCast Corp.

The Russian space agency, Roscosmos, agreed to host the cameras on the $100 billion station, a project of 15 countries, in exchange for rights to use images and video taken over Russia. UrtheCast has commercial rights to images and video of the rest of the world, company Chief Executive Scott Larson told Reuters.

UrtheCast intends to sell data to companies and government agencies that buy Earth-observing satellite imagery. It also plans to stream images over the Internet for free to subscribers, with the aim of attracting advertisers and sponsors.

Both ventures are on hold after an unknown glitch kept the cameras, located outside the station's Zvezda command module, from communicating with ground stations.

"Unfortunately, those cameras ... did not provide any electrical signals on the ground," Navias said.

In an email to Reuters, UrtheCast said there was "an issue with the connectivity to the cameras."

"We decided to have the cameras brought back into the (space station) while Roscosmos works on resolving connectivity," the company said.

Kotov and Ryazanskiy disconnected the cameras and cabling, which cut into time allotted to replace several science experiments. The cosmonauts ended up spending eight hours and seven minutes outside the space station, the longest spacewalk in Russian space history.

The world record longest spacewalk was an 8-hour, 56-minute excursion by NASA astronauts Susan Helms and Jim Voss in March 2001.

Russia successfully launched an upgraded version of its Soviet-design Soyuz rocket on Saturday, the Defence Ministry said, giving a boost to the country's troubled space program.

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The launch of the Soyuz 2.1v rocket, which features a new engine and digital guidance system, had originally been planned for the beginning of 2012 but was postponed due to an accident during testing which caused engine damage, Interfax reported. It was then scheduled to be launched earlier this week but was delayed again, Interfax reported.

A spokesman said it was a debut launch for the rocket to place a scientific earth-monitoring satellite into orbit.

The Soyuz 2.1v is the latest addition to Russia's Soyuz family of rockets, which has become the world's most frequently used booster since its first launch in 1966. In 1961, a prototype of the Soyuz, Vostok, carried the first cosmonaut Yuri Gagarin into space. Today, its descendants are the only way to ferry astronauts to the International Space Station.

Despite an improved budget, Moscow's space program has suffered a series of humiliating launch failures in recent years that industry veterans blame on poor management, the legacy of a decade of crimped spending and a brain drain.

(Reporting by Megan Davies and Alissa de Carbonnel, editing by David Evans)

Scientists seeking a cure for AIDS say they have been inspired, not crushed, by a major setback in which two HIV positive patients believed to have been cured found the virus re-invading their bodies once more.

True, the news hit hard last month that the so-called "Boston patients" - two men who received bone marrow transplants that appeared to rid them completely of the AIDS-causing virus - had relapsed and gone back onto antiretroviral treatment.

But experts say the disappointment could lay the basis for important leaps forward in the search for a cure.

"It's a setback for the patients, of course, but an advance for the field because the field has now gained a lot more knowledge," said Steven Deeks, a professor and HIV expert at the University of California, San Francisco.

He and other experts say the primary practical message is that current tests designed to detect even very low levels of HIV present in the body are simply not sensitive enough.

As well as having the human immunodeficiency virus (HIV), the Boston patients both also had a type of blood cancer called lymphoma, for which they were treated using bone marrow transplants - one man in 2008 and the other in 2010.

They continued taking the antiretroviral AIDS drugs, but eight months after each patient's transplant, doctors found they could not detect any sign of HIV in their blood.

In the early part of 2013, both patients decided to stop taking their AIDS drugs and both appeared to remain HIV-free - prompting their doctors, Timothy Henrich and Daniel Kuritzkes from Boston's Brigham and Women's Hospital, to announce at a conference in July that they may have been cured.

Yet in December came news that one of the men had begun to show signs of an HIV rebound by August, while the second patient had a relapse in November.

Henrich said the virus' comeback underlined how ingenious HIV can be in finding hiding places in the body to evade attack efforts by the immune system and by drug treatment.

"Through this research we have discovered the HIV reservoir is deeper and more persistent than previously known and that our current standards of probing for HIV may not be sufficient," he said, adding that both patients were "currently in good health" and back on antiretroviral therapy.

INSPIRATION

Barely a decade ago, few HIV scientists would have dared put the words HIV and cure in the same sentence. Yet some intriguing and inspiring cases in recent years mean many now believe it is just a question of time before a cure is found.

First was the now famous case of Timothy Ray Brown, the so-called "Berlin patient," whose HIV was eradicated by a complex treatment for leukemia in 2007 involving the destruction of his immune system and a stem cell transplant from a donor with a rare genetic mutation that resists HIV infection.

Such an elaborate, expensive and life-threatening procedure could never be used as a broad-spectrum approach for the world's 34 million HIV patients. But the results in Brown focused scientific attention on a genetic mutation known as 'CCR5 delta 32' as a target for possible gene therapy treatment.

Then last March, French scientists who followed 14 HIV-positive people known as the "Visconti patients", who were treated very swiftly with HIV drugs but then stopped treatment, said that even after seven years off therapy, they were still showing no signs of the virus rebounding.

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That announcement came only weeks after news of the "functional cure" of an HIV-positive baby in Mississippi who received antiretroviral treatment for 18 months from the day she was born. By the time she was two this appeared to have stopped the virus replicating and spreading.

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A "functional cure" is when HIV is reduced to such low levels that it is kept at bay even without treatment, though the virus can still be detected in the body.

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Sharon Lewin, an HIV expert at Monash University in Australia, said all these developments, as well as the setback suffered by the Boston patients, inspired scientists to investigate many different approaches in the search for a cure.

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"We've learnt many things here - and one of the most important is that a tiny, tiny amount of virus can get the whole thing going again," she told Reuters. "It's a clear message that we need better ways to pick up the virus."

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Scientists are now more convinced than ever that a two-pronged approach which aims to firmly suppress the virus while bolstering the immune system provides the best way forward.

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"We need to attack in two ways - reduce the virus to very low levels and also to boost the immune response. We can't do one without the other," said Lewin.

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"So we still have to think of other creative ways to control HIV. And it's still early days... before we can say which approach is likely to be the winner."

A mission to put humans on Mars that drew 200,000 applicants has selected more than a thousand candidates who will now be tested to come up with a final list of 24 would-be Mars-dwellers.

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Mars One was set up in 2011 by two Dutch men with the goal of establishing permanent human life on Mars in 2025. They hope the project will be funded by investors and the rights from the documentary-cum-reality TV broadcasting of the tests, training and final selection.

The 1,058 candidates who got through to the first round come from all over the world. By far the largest number - 297 - are American, followed by 75 Canadians and 62 Indians.

They must now undergo rigorous tests, including simulations of life on Mars and coping with isolation, co-founder Bas Lansdorp said.

"The challenge with 200,000 applicants is separating those who we feel are physically and mentally adept to become human ambassadors on Mars from those who are obviously taking the mission much less seriously," Lansdorp said.

A Space Exploration Technologies' Falcon 9 rocket blasted off from Cape Canaveral Air Force Station in Florida on Monday to put a commercial communications spacecraft into orbit for Thai satellite operator Thaicom.

The 224-foot-tall rocket lifted off its seaside launch pad at 5:06 p.m. (2206 GMT), soaring through overcast skies as it headed toward the satellite's drop-off point more than 55,000 miles above Earth, or about one-quarter of the way to the moon.

From that position, the 6,649-pound (3,016 kg) Thaicom 6 satellite is expected to lower itself to about 22,300 miles above Earth and shift the angle of its orbit so that it can be permanently stationed to beam high-definition and digital television services to customers in Thailand and surrounding areas.

The satellite, built by Virginia-based Orbital Sciences Corp, also is equipped to provide other communications services for customers in Southeast Asia and Africa, including Madagascar, Thaicom's website shows.

Including launch services and insurance, the Thaicom 6 satellite cost about $160 million, and so far, about two-thirds of the satellite's capacity has been sold, according to Thaicom.

Monday's launch was the second in just over a month for Space Exploration Technologies, also known as SpaceX.

In December, the California-based firm, owned and operated by technology entrepreneur Elon Musk, who is also chief executive of electric car maker Tesla Motors, launched its first commercial communications satellite, staking a claim in a global satellite launch industry. The industry is worth about $6.5 billion a year, a study by the Satellite Industry Association trade group shows.

So far, privately owned SpaceX has sold about 50 commercial launches worth about $4 billion. About 25 percent of the flights are for NASA, which hired SpaceX, along with Orbital Sciences, to fly cargo to the International Space Station, a $100 billion research complex that flies about 250 miles above Earth.

SpaceX's next flight, slated for late February, will be the third of 12 station resupply missions under its $1.6 billion NASA contract.

Orbital Sciences, which holds a separate $1.9 billion NASA contract, is preparing to launch the first of its eight station cargo runs on Wednesday. The company's Antares rockets fly from a commercial spaceport on Wallops Island, Virginia.

With Monday's launch, Falcon 9 rockets have flown eight times, all successfully, though on its first cargo flight to the station, in October 2012, one of the rocket's nine first-stage engines shut down prematurely. Other motors compensated, and the rocket was able to deliver its Dragon cargo ship to the intended orbit without a problem.

SpaceX is working on three parallel programs to expand its business and cut costs, including reusing its first-stage boosters. However, a proposed demonstration to restart the engine so it could cushion the splashdown into the ocean was not attempted on the Thaicom 6 mission, said SpaceX spokeswoman Emily Shanklin.

HEAVY-LIFT FALCON MISSION

In addition, the company is working on a 27-engine, heavy-lift Falcon rocket as well as a version of its Dragon cargo capsule that can carry astronauts and other passengers to the space station.

A Falcon Heavy demonstration mission from SpaceX's second launch site at Vandenberg Air Force Base in California is slated for 2014, the company's website shows.

Monday's successful flight also could clear SpaceX to enter a lucrative competition to launch U.S. military reconnaissance and communications satellites, a service now exclusively provided by United Launch Alliance, a partnership of Lockheed Martin and Boeing.

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(Editing by Kevin Gray, Cynthia Osterman and Leslie Adler)

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(In January 6 item, this story corrects value of SpaceX commercial launches in 8th paragraph to $4 billion, not $40 billion

The Obama administration wants to keep the International Space Station, a $100 billion orbital research outpost that is a project of 15 nations, flying until at least 2024, four years beyond a previous target, NASA said on Wednesday.

The extension will give the U.S. space agency more time to develop the technologies needed for eventual human missions to Mars, the long-term goal of NASA's human space program.

Keeping the station in orbit beyond 2020 also opens a window for commercial companies and researchers to benefit from hefty U.S. investment in the outpost.

NASA's costs for operating the station, which flies about 250 miles above Earth, run about $3 billion a year. About half that sum is spent on transporting crew and cargo.

"This extension… opens up a large avenue of research onboard station. It also changes the perspective for the commercial (transportation) providers. Now they can see a market that extends to at least 2024," he said.

In addition to commercial U.S. cargo ships and planned passenger space taxis, companies and research organizations are beginning to make use of the station's unique microgravity environment to develop a range of new products and technologies, including medications and off-the-shelf, shoebox-sized satellites.

Construction of the orbital outpost began in 1998. The prime partners in the venture, with the United States, include Russia, Europe, Japan and Canada. It has been permanently staffed by rotating crews of astronauts and cosmonauts since 2000.

Extending the station "is not a U.S.-only decision," Gerstenmaier said. "We talk to our partners about this. They want to go forward with this. It's just working through the government approval," he said.

"We're prepared to do what we have to do if the partners choose to take a different path," Gerstenmaier added.

A technical review by prime station contractor Boeing shows the station's laboratories, structural frame and other hardware are safe to fly until 2028, program manager John Shannon said earlier on Wednesday at the opening of an international space exploration and policy summit.

"If the physical hardware continues to operate the way we believe it does ... that leaves the door open in the future to extend," Gerstenmaier said.

At the end of its life, the station will be steered down into the atmosphere, where it will incinerate. Re-entry will take place over an ocean so any surviving debris will not threaten populated areas.

The first of up to six U.S. supply runs to the station this year was slated for launch on Wednesday, but the flight was canceled due to extremely high levels of radiation caused by a huge solar flare.

Orbital Sciences Corp, one of two firms hired by NASA to ferry cargo to the station following the retirement of the space shuttles in 2011, may try to launch its Antares rocket and Cygnus cargo ship on Thursday. The rocket flies from a commercial spaceport on Wallops Island, Virginia.

The launch, which was broadcast live on NASA Television, was delayed twice this week, first by cold weather and then by high space radiation due to a massive solar flare on Tuesday. Both conditions could have affected critical rocket systems.

Orbital Sciences is one of two firms hired by the National Aeronautics and Space Administration to fly cargo to the station, a $100 billion project of 15 nations, following the retirement of the space shuttles in 2011.

Privately owned Space Exploration Technologies, or SpaceX, is preparing for its third supply run on February 22 from Cape Canaveral Air Force Station in Florida.

Thursday's launch was the third for Antares, a medium-lift rocket that Orbital Sciences also is marketing for satellite launches.

"We are negotiating with people with other payloads besides the Cygnus spacecraft and intend to fly more cargo out of Wallops," Culbertson told reporters before the launch. He declined to elaborate on prospective customers.

The company holds a $1.9 billion contract with NASA to fly eight Cygnus cargo ships to the station, a permanently staffed research outpost that flies about 250 miles above Earth.

SpaceX has a separate 12-flight NASA contract worth $1.6 billion.

Both companies expect to benefit from the Obama administration's decision on Wednesday to keep the station flying to at least 2024, a four-year extension.

Technically, the station is expected to remain structurally sound until at least 2028, according to a study by prime station contractor Boeing.

"It does give us a chance to think long-term, be innovative ... maybe invest in some improvements in how we can do this to make it more cost-effective and efficient," Culbertson said.

In addition to their station resupply contracts, Orbital Sciences and SpaceX previously received a combined $686 million from NASA to help develop their rockets, capsules and launch sites.

Orbital Sciences debuted its Antares rocket in April 2013 and made a successful test run to the space station five months later. It planned to start flying cargo in December, but NASA delayed the launch to tackle a high-priority repair to the station's cooling system.

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Cygnus is loaded with 3,221 pounds (1461 kg) of equipment and supplies for the station, including science experiments, computers and replacement parts for NASA's spacesuits.

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The capsule also holds food, fresh fruit and belated Christmas gifts for the crew. "We haven't changed them out for Valentine's cards," Culbertson quipped.

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The freighter is due to arrive at the station shortly after 6 a.m. EST/1100 GMT on Sunday.

Virgin Galactic's SpaceShipTwo, a six-passenger, two-pilot spacecraft aiming to make the world's first commercial suborbital spaceflights later this year, conducted its third rocket-powered test flight on Friday.

With Virgin Galactic chief pilot David Mackay and co-pilot Mark Stucky at the controls, SpaceShipTwo soared to an altitude 71,000 feet above ground - about twice as high as commercial jetliners, Virgin Galactic said on Twitter.

The 20-second rocket burn, over California's Mojave desert, propelled the ship to 1.4 times faster than the speed of sound, the company said.

It was the third powered test flight for SpaceShipTwo, which was designed and built by Mojave, Calif.-based Scaled Composites, a subsidiary of Northrop Grumman Corp.

"She flew brilliantly," Mackay said in a statement from Virgin Galactic after landing.

"To be behind the controls and fly it as the rocket ignited is something I will never forget," Mackay added.

The spacecraft, which is hauled into the air by a carrier jet and released, also has made 28 glide flights. It is modeled after the prize-winning SpaceShipOne prototype, which made a trio of suborbital spaceflights in 2004 to clinch the $10 million Ansari X Prize for the first privately funded human spaceflights.

With SpaceShipTwo tucked between its twin hulls, Virgin Galactic's White Knight Two carrier jet took off from the Mojave Air and Space Port just after dawn. An hour later, Mackay landed the spaceship safely back on the runway, Virgin Galactic said on Twitter.

Virgin Galactic, a U.S. offshoot of billionaire Richard Branson's London-based Virgin Group, is selling rides on SpaceShipTwo for $250,000. So far, more than 650 people have put down deposits or paid for rides. Branson and his two children are expected to fly on the first passenger flight late this year.

"I couldn't be happier to start the New Year with all the pieces visibly in place for the start of full space flights. 2014 will be the year when we will finally put our beautiful spaceship in her natural environment of space," Branson said in a statement.

The upcoming flights are designed to reach altitudes of more than 65 miles above Earth, high enough to see the curvature of the planet set against the blackness of space. Riders also will experience a few minutes of weightlessness before the ship re-enters the atmosphere.

SpaceShipTwo's last rocket-powered flight was in September, part of a rigorous test program prior to the start of commercial flight services.

Other companies developing passenger suborbital spacecraft include privately owned XCOR Aerospace, which is building a two-person spaceplane called Lynx, and Blue Origin, a startup space company owned by Amazon founder Jeff Bezos.

Virgin Galactic also plans to use its White Knight Two carrier jets to launch small satellites and payloads into orbit.

Officials from 32 of the world's space-faring nations concluded a trio of summits on Friday to tackle expanding participation in the International Space Station and planning for eventual human expeditions to Mars.

Fifteen nations collaborated to build the space station, a permanently staffed research complex that flies about 250 miles above Earth. On Wednesday, the Obama Administration announced its intent to extend station operations to at least 2024, four years beyond when it was slated to be removed from orbit.

"We're very happy to hear about extension," Xu Dazhe, administrator of the China National Space Administration, said Friday at the International Academy of Astronautics conference, one of three global space summits hosted in Washington this week.

"It means that by the time our space station is being built, we would have a companion up there," Xu said, speaking through a translator.

China has a prototype station in orbit and plans to launch the core module of a follow-on outpost in 2018. Two laboratory modules would follow in 2020 and 2022.

Congress has banned the U.S. space agency NASA from direct collaborations or partnerships with China, primarily due to concerns about technology transfer. China does have scientists participating in the station's premier experiment, the Alpha Magnetic Spectrometer particle detector.

The U.S.-Chinese relationship is among the thornier issues facing leaders of 32 space agencies, who also discussed robotic exploration of the solar system, detecting potentially threatening asteroids, expanding commercial space ventures and other initiatives.

In parallel space policy summit, hosted for the first time by the U.S. Department of State, Deputy Secretary William Burns said on Thursday that countries should make space exploration "a shared global priority."

"Despite the many pressures, challenges and urgent priorities facing the United States at home and abroad, our commitment to space exploration is only growing stronger," Burns said.

The conferences also addressed expanding space programs in developing countries as a way to create new business opportunities, as well as serve educational purposes.

"Our emphasis ... is mostly on applications," Seidu Oneilo Mohammed, director general of Nigeria's National Space Research and Development Agency, told reporters at a press conference on Friday.

In addition to more communication satellites, "our concern is feeding our people, creating jobs and eliminating poverty. That relies more and more .. on agricultural management," he said.

Follow-on studies from the conferences are expected to generate specific initiatives in robotic exploration of the solar system, planetary protection, human spaceflight, asteroid mining, space-based solar power systems and other areas.

The United States and Canada have signed an agreement to share data on orbiting space debris, asteroids and other hazards to space flight, the U.S. military said on Friday.

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The agreement, signed on December 26 with Canada's Department of National Defence, permits an advanced exchange of data, the U.S. Strategic Command, which oversees the American military's space operations, said in a statement.

"We were pleased to finalize this data-sharing agreement with Canada, one of our closest allies. These agreements are mutually beneficial, provide for greater space flight safety and increase our national security," Admiral Cecil Haney, commander of U.S. Strategic Command, said.

The agreement streamlines the process for Canada to request specific information gathered by U.S. Strategic Command's Joint Space Operations Center at Vandenberg Air Force Base in California, the statement said.

The information is crucial for space launches, satellite maneuvering and decommissioning, and other space activities, it said.

Canada joins Japan, Australia and Italy in participating in these agreements with the United States.

Scientists estimate there are about 29,000 pieces of man-made space debris larger than 4 inches orbiting Earth at average speeds of 15,500 miles per hour. At that speed, even small pieces of debris can damage or destroy spacecraft and satellites.

Orbital Sciences Corp, one of two companies hired by U.S. space agency NASA to make supply runs to the International Space Station, delivered its first cargo ship on Sunday, a NASA TV broadcast showed.

Space station flight engineer Mike Hopkins used the outpost's 60-foot-long (18 meter) robotic arm to pluck a Cygnus freighter capsule from orbit at 6:08 a.m. EST as the two ships sailed 264 miles over the Indian Ocean, northeast of Madagascar.

"A big sigh of relief for Orbital," said astronaut and NASA TV commentator Catherine "Cady" Coleman from Mission Control in Houston.

About two hours later, Hopkins latched the capsule, which is about the size of a small bus, to a docking port on the space station's Harmony module.

The capsule is loaded with 3,221 pounds (1,461 kg) of food, equipment, science experiments and supplies for the station, including computers and replacement parts for NASA's spacesuits.

Several commercial payloads also are aboard the Cygnus freighter, including a "CubeSat" launcher owned by Houston-based NanoRacks. CubeSats are 4-inch-sided, standardized, relatively inexpensive spacecraft. They produce their own power, transmit signals and are used for a variety of scientific purposes. Individual CubeSats can be configured to fly together.

The launcher will be operated from Japan's Kibo module, which includes a small airlock, robotic arm and external platform. The Japan Aerospace and Exploration Agency already operates a similar CubeSat launcher.

The Cygnus capsule is scheduled to remain docked to the outpost for about 45 days, and will be unpacked, then refilled with trash and items no longer needed aboard the station.

Astronauts will then use the station's robot arm to remove the capsule and release it into orbit so it can drive itself into the atmosphere for incineration.

Orbital Sciences and privately owned Space Exploration Technologies, or SpaceX, have NASA contracts worth a combined $3.5 billion for a total of 20 cargo flights to the space station, a $100 billion research complex owned by the United States, Russia, Europe, Japan and Canada.

Orbital Sciences made a successful test flight to the station in September. On Thursday, the Virginia-based company launched the first of eight paid missions for NASA. SpaceX meanwhile is preparing for its third cargo run on February 22.

NASA hired the companies following the retirement of the space shuttles in 2011. The U.S. space agency also is managing a heated three-way competition between SpaceX, Boeing Co and privately owned Sierra Nevada Corp, to develop spaceships to fly astronauts.

NASA hopes to break the Russian government's monopoly on station crew taxi flights by 2017.

Rides on Russian Soyuz capsules currently cost the United States more than $60 million per person. The price will rise to more than $70 million in 2016.

NASA meanwhile is developing a heavy-lift rocket and capsule for future human missions into deep space, such as the moon and Mars beyond the station's orbit.

Australian scientists are gluing tiny sensors onto thousands of honey bees to track their movements in a trial aimed at halting the spread of diseases that have wiped out populations in the northern hemisphere.

Scientists at the Commonwealth Scientific and Industrial Research Organisation (CSIRO), Australia's national science agency, said the microchips could help tackle so-called colony collapse disorder, a situation where bees mysteriously disappear from hives, and the encroachment of the parasitic varroa mite.

Scientists will use tweezers to glue on the sensors, weighing about 5 milligrams and measuring 2.5 millimeters (a little more than 1/16 of an inch) square, after soothing the bees to sleep by refrigeration.

Some young bees, which tend to be hairier than older bees, need to be shaved before the sensor can be glued on.

Scientists will examine the effectiveness of pesticides in protecting the bees from colony collapse disorder and varroa mite.

The study will also enable farmers and fruit growers to understand and manage their crops, given the honey bee's crucial role in the pollination of crops globally, the CSIRO said in a statement issued on Wednesday.

"Honey bees play a vital role in the landscape through a free pollination service for agriculture, which various crops rely on to increase yields," the CSIRO's Paulo de Souza, who is leading the project, said in the statement.

"Using this technology, we aim to understand the bee's relationship with its environment."

Scientists plan to fit sensors on 5,000 bees in the southern island state of Tasmania over the Australian summer.

The radio frequency identification sensors work like an electronic tag for cars on a toll road, recording when insects pass a checkpoint. That will allow scientists to build a three-dimensional image of the insects' movements, a process described as "swarm sensing".

The scientists are working on shrinking the sensor to 1 mm square so they can be attached to smaller insects, including mosquitoes.

China has flight-tested a hypersonic missile delivery vehicle in a move that was scientific in nature and not targeted at any country, the Defence Ministry said on Wednesday.

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A Chinese military build-up has raised regional jitters. Many countries in Asia have welcomed a stated U.S. intention to shift more attention and military assets back to the region. They are beefing up military spending and ties with Washington.

"Our planned scientific research tests conducted in our territory are normal," the Beijing Defence Ministry said in a faxed response to Reuters. "These tests are not targeted at any country and at any specific goals."

The statement confirmed a report by the online Washington Free Beacon newspaper that the hypersonic glide vehicle (HGV) was detected flying at 10 times the speed of sound over China last week.

A spokesman for the Pentagon said it was aware of the test.

"We routinely monitor foreign defence activities and we are aware of this test," said Lieutenant Colonel Jeffrey Pool, a Pentagon spokesman:

"However, we don't comment on our intelligence or assessments of foreign weapon systems. We encourage greater (Chinese) transparency regarding their defence investments and objectives to avoid miscalculation," he said.

The Free Beacon said the test made China the second country after the United States to have successfully tested a hypersonic delivery vehicle able to carry nuclear warheads at a speed above Mach 10 - or 12,359 kilometers per hour (7,675 mph).

Three decades of double-digit, annual increases in military spending have accelerated Beijing's ambitious build-up and allowed Chinese defence factories to boost the quality and performance of home-grown weapons and military hardware.

President Barack Obama on Wednesday announced a new public-private manufacturing hub in North Carolina during his visit to the state, seeking to bolster an industry that he considers essential to raising middle class incomes.

The manufacturing hub in Raleigh is a consortium of 18 businesses and six universities that will be led by North Carolina State University and will lead an institute to develop high-power electronic chips. Obama had called for three such hubs in his State of the Union speech a year ago. The other two have yet to be selected.

Backed by $70 million in federal funding, the hub would connect manufacturers with emerging research on energy-efficient chips that would help make electronic devices smaller and faster. Companies involved include ABB, APEI, Avogy, Cree, Delphi, Delta Products, DfR Solutions, Gridbridge, and Hesse Mechantronics, among others.

Eager to press economic themes in an election year after struggling with the rollout of his healthcare plan, Obama has said he would like to create a network of 45 manufacturing hubs around the country, but that would require money from Congress, which has not been as enthusiastic about the idea.

"I don't want the next big job creating discovery, the research and technology, to be in Germany, or China or Japan; I want it to be right here in the United States of America," Obama said on the North Carolina State University campus following a tour of Vacon, which manufactures components used in electronic engines.

"Where I can act on my own I'm going to do so, and today I'm here to act," he said. "Manufacturing is a bright spot in this economy."

While manufacturing accounts for only about 12 percent of the economy, it has been the key driver of recovery from the 2007-09 recession. Its continued show of strength is combining with improving fortunes in other sectors of the economy to set a foundation for sustained strong growth this year.

But problems persist. Intel said a major chip factory it had built in Chandler, Arizona, will not open for the forseeable future. Obama, on the campaign trail in 2012, had held up the facility as an example of U.S. manufacturing potential.

Although manufacturing output has recovered well from the recession, job growth in the sector has not tracked the gains, said Peter Ward, professor of operations management at the Fisher College of Business at Ohio State University.

"The number of jobs in manufacturing don't reflect the bounce back in output," Ward said. "Manufacturers are doing more with less."

Obama's decision to bail out the auto industry was key to helping the manufacturing sector recover, said Mark Zandi, chief economist at Moody's Analytics.

"I think the Obama Administration has been generally manufacturing friendly, certainly in rhetoric but also in substance," Zandi said.

While the president can take some credit for increased demand for goods and services, gains in manufacturing come from management decisions and worker productivity, Ward said.

"I really have a pretty hard time putting a causal link between any president and what happens in the manufacturing economy," he said. "It's much more the management and performance of smart managers and smart workers who are out there doing it."

Obama said he plans to soon unveil two more manufacturing hubs focused on digital manufacturing and lightweight metals manufacturing.

The government will spend a total of $200 million on the three centers, which will be matched by money from private companies, universities, and state governments.

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UNEMPLOYMENT INSURANCE

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Obama's efforts to spur stronger economic growth have been overshadowed by his inability so far to persuade Congress to approve legislation extending emergency unemployment insurance for people who have been out of work for at least six months.

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The president has said the benefits would provide 1.5 million Americans a much-needed cushion and also would boost growth.

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Despite pressure from the administration, Democrats and Republicans in the U.S. Senate rejected one another's proposals on Monday. While they vowed to keep working to find middle ground, a compromise appears unlikely before next week's Senate recess. The measure would also have to pass the Republican-led House of Representatives.

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Obama's presence in North Carolina comes as the Republican-dominated state government has carried out a conservative agenda, cutting jobless benefits, banning same-sex marriage, and freezing pay for teachers.

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In that environment, North Carolina's Democratic Senator Kay Hagen faces a tough reelection battle in November. She was not with Obama during the trip, citing the need to participate in votes in Washington - although Obama thanked her for her hard work during his speech.

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Analysts said it would not serve her to be too closely associated with Obama, whose bungled healthcare law roll-out has reduced his popularity ratings in the state.

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"Kay Hagen is suddenly reluctant to associate herself with Obama," the Republican National Committee said in a statement.

The U.S. House of Representatives overwhelmingly approved a $1.1 trillion spending bill on Wednesday that quashes the threat of a government shutdown through September 30 and offers lawmakers a chance to end four years of chaotic, crisis-driven budgeting.

The 359-67 vote, reflecting strong bipartisan support in the Republican-controlled chamber, sends the measure to the Democratic-controlled U.S. Senate for approval by Saturday.

The Senate gave itself three more days to consider the measure by approving an extension of current funding that was due to expire at midnight on Wednesday.

The massive "omnibus" spending bill, which funds programs from missile systems to Amtrak rail services, passed with strong majorities of both House Republicans and Democrats. It boosts fiscal 2014 spending on military and domestic discretionary programs by $45 billion over levels that had been scheduled under automatic, "sequester" spending cuts.

The measure fleshes out a budget deal passed in December that also set spending levels for fiscal 2015, eliminating a key source of congressional gridlock for the year ahead. Many lawmakers say this will allow them to pass normal spending bills for the first time since 2009, President Barack Obama's first year in office.

"This is a critical step in the direction of regular order," Democratic Representative Marcy Kaptur of Ohio said of the spending bill.

STOPGAP CONGRESS

For the past four years, Congress has funded government agencies through a series of stopgap spending bills and funding extensions, with numerous threats of shutdowns and U.S. Treasury debt defaults along the way.

The budget fights, fueled by demands for deficit reduction from the Republicans who seized control of the House in 2010 elections, reached a crescendo in October, when disputes over funding of "Obamacare" health insurance reforms prompted a 16-day shutdown for many agencies, idling thousands of federal workers.

With public approval ratings plummeting and midterm elections looming in November, Congress has since shown little stomach for further brinkmanship, allowing budget negotiators to craft bipartisan compromises.

But it is far from certain whether those compromises will continue. By March or April, Congress will need to approve another federal debt limit increase, a move that has recently been used by Republicans as a pressure point for more spending cuts.

And lawmakers who did not get the cuts or funding increases they wanted in the omnibus spending bill will be back almost immediately to fight for their priorities as the fiscal 2015 appropriations process gets under way.

Representative Nita Lowey, the top Democrat on the House Appropriations Committee, said the process will give Democrats a more time to "plus-up" some programs they believe are still underfunded, such as the National Institutes of Health and the Environmental Protection Agency.

"I'm going to try and adjust the bills to make sure we're addressing the real needs out there," the New York lawmaker told Reuters in an interview.

Meanwhile, some Republican lawmakers have said they would seek to eliminate some programs they regard as ineffective in order to find money to fund military priorities they regard as critical.

With non-war, discretionary funding largely unchanged between fiscal 2014 and fiscal 2015, making those changes will likely prove contentious.

(Reporting By David Lawder; Editing by Steve Orlofsky and Jonathan Oatis)

U.S. President Barack Obama nominated Maria Contreras-Sweet on Wednesday to lead the Small Business Administration, an agency that provides loans and helps small businesses get government contracts.

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"She understands the needs of small business owners like herself. She knows how they can lift entire communities, and ultimately how they lift our country," Obama said in making the announcement at the White House.

She is the second Hispanic nominated to Obama's second-term cabinet after Labor Secretary Tom Perez.

Contreras-Sweet founded ProAmerica Bank, a Latino-owned community bank in Los Angeles, which focuses on lending to small- and medium-sized Latino businesses.

"Maria knows how hard it is to get started on a business, the grueling hours, the stress, the occasional self-doubt - although I have not yet seen self-doubt out of Maria," Obama said.

The Mexican-born Contreras-Sweet was California's secretary of business, transportation and housing in the Democratic administration of Gray Davis. She immigrated to the United States as a child.

(Reporting by Steve Holland and Roberta Rampton; Editing by James Dalgleish)

Earmarks may be a thing of the past for Congress, but lawmakers still tout their ability to deliver the bacon through a $1.1 trillion federal spending bill that won passage in the House of Representatives on Wednesday.

The 1,582-page bill is officially free of the spending for pet projects that spurred public outrage and were banned in 2010 after Republicans won control of the House of Representatives.

But with November congressional elections looming, lawmakers from both parties are promoting their roles in shaping the legislation in ways that will improve life back home. The bill, which funds wide swaths of the U.S. government, is expected to pass the Senate by the end of the week.

Republican Sen. Jerry Moran of Kansas said in a press release that he helped win $404 million for a home-state facility to study foreign animal disease outbreaks. He also noted that the bill would create jobs by funding an Air Force base expansion in the state.

Three Democratic House members from the San Diego region - Scott Peters, Susan Davis and Juan Vargas - said the bill pays for more traffic lanes at a busy Mexican border checkpoint.

Those projects bear little similarity to widely ridiculed historic earmarks like the Teapot museum in North Carolina or the "Bridge to Nowhere" in Alaska, which came to symbolize wasteful government spending.

Although current spending provisions are not labeled as earmarks, "they're earmark-ish, they're earmark-esque," said Steve Ellis, an analyst at the watchdog group Taxpayers for Common Sense.

Simpson, for example, influences nuclear program spending as head of the House Energy and Water Appropriations Subcommittee. The final bill increases spending for the Idaho National Laboratory, a nuclear-research facility in Simpson's district, by at least $24 million over the administration's request. It also adds another $22 million for clean-up of his state's contaminated nuclear-energy and weapons testing sites.

A Simpson spokeswoman called the spending appropriate for a vital federal facility.

"The Idaho National Laboratory is a federally owned, federally funded national laboratory dedicated to energy research and national security, so of course it received funding," Simpson spokeswoman Nikki Watts said.

Staffers for Moran and Peters said projects they championed could not be classified as earmarks because they originated with the Obama administration, not with Congress.

"These projects are about as far from earmarks as you can get," said Moran spokeswoman Garrette Silverman.

Not every benefit in the bill entails a spending hike.

Sen. Barbara Mikulski, a Maryland Democrat who as chairman of the Appropriations Committee led negotiations on the bill, said in a press release that it would help her state's struggling seafood industry by bringing in more foreign workers to pick crabs and shuck oysters during harvest time.

Louisiana Democratic Sen. Mary Landrieu and Republican Rep. Bill Cassidy, who hopes to unseat Landrieu in November, both touted the bill's inclusion of a one-year delay to a planned flood-insurance premium for state homeowners.

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Democratic Rep. Jose Serrano added a provision to delay plans by the cash-strapped Postal Service to sell historic post office buildings - a priority in his Bronx, New York, district, where residents face the potential loss of a landmark building filled with Depression-era murals.

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Serrano said his rider is not an earmark because it does not involve spending and also would apply to historic Post Office buildings nationally.

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He said earmarking once helped out local interests that otherwise could not navigate the federal bureaucracy.

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"It gave a member of Congress who knows his or her community best an opportunity to bring dollars to local originations that ordinarily would not get a cent from the federal government because they don't have the contacts," he said in an interview.

Besides, there is nothing wrong with protecting local interests, said Sean Kelly, a political science professor at California State University Channel Islands who studies the federal budgeting process.

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"This is members of Congress doing what they're supposed to do, which is advocating for their programs, for their districts. That's what the game is about," he said.

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Some Republicans are beginning to question their party's rigid stance on earmarks. Texas Republican Reps. John Carter and John Culberson, who hold senior positions on the House Appropriations Committee, have said recently that the earmark ban shifted too much spending control to the Obama administration.

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But House Speaker John Boehner said the ban has helped Republicans rein in spending.

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"Republicans have listened to the American people and kept their promise to end business as usual in Washington," Boehner's office said.

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Serrano said the significance of earmarks had been overblown.

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"I remember once they attacked a cheese museum in Wisconsin. That's an easy one, because it sounds funny, but cheese is very important to Wisconsin, and it's been a part of their culture for a long time," he said. "What's important to one state or one member of Congress may not sound that important to a reporter from another place."

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(Additional reporting by David Lawder; Editing by Marilyn Thompson and Dan Grebler)